How ASIC blew $30 million on Andrew Forrest

Andrew “Twiggy" Forrest’s lawyer, Perth-based Gadens partner James Scovell, was waiting with bated breath and staring at his computer screen in his Perth office on Tuesday this week. He wanted to be the first to call his client to break the biggest news of his career.

After more than six years of bitter fighting with the corporate regulator, Scovell says Forrest’s reaction was exhilaration.

The lawyer has seen up close the personal toll the prolonged case has taken on the high-profile mining magnate. “He was obviously extremely happy," he says. “After all this time, there was a profound sense of vindication."

For the Australian Securities and Investments Commission, the feeling couldn’t have been more different. Not only has the regulator failed to bag their biggest ever scalp – Australia’s richest man in 2008 with wealth of close to $10 billion – and ended up with egg on its face courtesy of the damning High Court judgment, it now has even bigger problems as questions mount about its litigation strategy in the wake of the resounding defeat.

The case has also left an ugly cloud over the already complex area of company disclosure rules.

Sources close to the litigation claim the regulator’s legal bill could run to more than $30 million by the time ASIC pays for the legal costs on all sides. While the government says ASIC is “free to take any action it believes appropriate", the expensive loss hardly bodes well at a time when ASIC chairman
Greg Medcraft
is lobbying hard in Canberra to avoid any budget cuts.

So what went so horribly wrong for the regulator? What is clear is that when ASIC decided to try and cut down one of Australia’s tallest poppies in Twiggy Forrest, it determined that no expense should be spared.

The approach was a legacy of former ASIC chairman Tony D’Aloisio, previously chairman of law firm Mallesons Stephen Jaques (now King & Wood Mallesons). He restructured ASIC in 2007, causing an exodus of staff as he pushed for the use of external and expensive law firms during an era of big litigation.

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ASIC hired a crack team of legal guns lead by barristers Neil Young, QC and Murugan Thangaraj, SC, who were instructed by Mallesons managing partner Beau Deleuil and a team of lawyers in Perth.

ASIC and Mallesons claim the firm was engaged under former ASIC chairman Jeff Lucy rather than by their former chairman D’Aloisio, rejecting claims by some of a potential conflict of interest.

As with ASIC’s failed eight-year One.Tel proceedings – where its case was slammed for being “excessively long and burdensome" – this case was prepared by some of the best legal minds in the country and was reviewed by as many as seven senior counsel.

Yet the complexity of the advice was unanimously rejected by the High Court this week, which criticised the lawyers for providing “hundreds, if not thousands of alternative and cumulative combinations of allegations".

Ironically, when the regulator first launched the case back in 2006, the Australian Government Solicitor prepared a very simple case. So much so that Forrest’s lawyers slammed it as “hideously defective".

That was a rag to a bull for ASIC, which switched to a team of silks and Mallesons in early 2007. They matched up against Forrest’s team of Gadens, who briefed leading silk Allan Myers, QC; and
Fortescue
’s Clayton Utz, which briefed, John Karkar, QC and David Jackson QC.

Mallesons hit Forrest and Fortescue with a massive new case in 2007 loaded up with as many as 50 separate allegations. This approach, with the additional levels of detail, ultimately became ASIC’s undoing.

“By the time we got to trial in April 2009 our opponents had produced something of a monster statement of claim," Fortescue’s lawyer Mark van Brakel says.

“It had continued to evolve in size and complexity from the start of the action when ASIC geared up with a top-tier law firm and Queen’s counsel, so the case rapidly had the hallmarks of one where it was necessary to fight fire with fire."

Both sides dug in during the five long weeks of the initial 2009 trial in the Federal Court in Perth, and no meaningful attempt was made at mediation. The trial included lengthy evidence from ASIC’s three expert witnesses. One of those experts, fund manager Andrew Sisson, says he described that “the announcement would be expected to move the share price".

History shows Forrest’s initial press conference on August 23, 2004 pushed the company share price up by around 7 per cent. More details sent the share price up another 35 per cent on November 9, 2004. But following a story in The Australian Financial Review in March 2005, Fortescue published the agreements and the company share price fell by more than 25 per cent. ASIC launched an investigation and subsequently launched a case in 2006, claiming that Forrest and Fortescue had misled investors when it said it had signed binding contracts with Chinese customers.

Van Brakel, who continued to act for Fortescue when he moved from Clayton Utz to Corrs Chambers Westgarth in October 2009, remembers the roller coaster ride as ASIC lost at first instance in December 2009, but then appealed and won before the full Federal Court in May last year. But ASIC’s glory would be short-lived.

At the same time, the company was battling increasing debt woes and waning commodity prices, Forrest stood down as Fortescue’s chief executive last year while his lawyers geared up for a final push to the High Court, which heard the case over two and a half days in late February and early March this year.

Aside from admonishing ASIC, the High Court majority concluded it would be “extreme or fanciful" for investors to believe the Chinese-signed contracts could ever be enforced in Australia. Justice Dyson Heydon went further by claiming that investors were “sufficiently tough, shrewd and sceptical" to know the truth.

Forrest spent the day of the decision at his daughter’s musical recital and only spoke to the media on Friday after the total annihilation of ASIC.

His low-key week was a far cry from the series of press releases and press conferences Forrest held back in 2004, when he was spruiking the “binding" contracts signed with state-owned Chinese construction companies to build and finance the company’s massive Pilbara infrastructure project which the Chinese ultimately never funded.

While Forrest waited until the end of the week to come out publicly, his friends and backers have been quick to come to his support.

“He can’t be anything else but admired for his capacity to fight against all odds and ultimately win," his good mate and trucking magnate Lindsay Fox told The Australian Financial Review. Fortescue deputy chairman Herb Elliott described the case as an “expensive distraction".

As always, to the victor go the spoils. While Forrest and the company say they plan to get on with life, ASIC and their highly expensive legal team will be unravelling the lessons for months and possibly years to come. Sources close to the ASIC legal team claim it wasn’t a fair fight, as the High Court pushed to hear a flurry of cases ahead of Friday’s retirement of Justice William Gummow and let their frustration over the pleadings to boil over.

They say while the case related to 13 public statements, covering three agreements over nine months, the High Court focused on just one: the initial August 23, 2004 statement.

Despite the residual bitterness, ASIC have promised to review their litigation strategy and learn any lessons while current ASIC chairman Greg Medcraft – a non-lawyer – is showing a greater willingness to avoid the big charging law firms and long-running cases. Who could blame him?